by Gary Foreman

Dear Dollar Stretcher,
What you would advise as far as getting loans to pay off credit cards. I have
two of them with a minimum payment of over $100 a month. Its very hard to make
that. Should I take a loan out from a bank?

I’ve tried doing balance transfers and I still end up having to use the card to
help pay for the groceries that I can’t cover with cash. It also gets used when
it comes to car repairs and house emergencies. We don’t use it foolishly only as
a lifesaver for necessities. I am scared of having a late mortgage payment. That
is going to happen this month for the first time. It seems things are getting
worse financially. I really hope you can help us out.
Curly

Based on our mail Curly is not alone. In fact The American Bankruptcy
Institute reported that during the second quarter of 2000 there were over
300,000 personal bankruptcy filings. And other sources indicate that there are
over 1.5 million people using credit counseling services to help them dig out of
debt. So Curly has a lot of company.

Her question really has two parts. First, could a consolidation loan relieve the
monthly payment pressure. And second, would that solve her debt problem?

It’s likely, but not certain, that the consolidation loan would reduce the
monthly payments. Without knowing what introductory rates she’s found or how
long they will last, it’s impossible to tell for sure.

She’ll need to know that most bill consolidation loans will want to use her home
as collateral. That means that her home is guaranteeing the repayment of the
loan.

The consolidation loan will probably have a lower monthly payment per $1,000
borrowed. That’s accomplished by spreading the repayment of the loan over a
longer period of time. So Curly needs to ask herself whether she’d rather
struggle to pay $100 per month for 3 years or would she prefer to pay $50 per
month for 9 years. That’s a very rough estimate, but does explain the available
options.

Trying to continue to find credit card ‘teaser rates’ is not likely to work.
Issuers can identify ‘swappers’ from their credit report. It shows accounts that
were open for a short time and then closed.

When potential lenders access her credit file, they’ll also find the late
mortgage payment that Curly says will occur this month. Those two facts combined
make her an undesirable risk for credit card companies. So sooner or later
she’ll be facing a more normal credit card interest rate of about 16%.

Given what’s happening to her payment record Curly could be facing even higher
rates. If she misses her minimum payment she’ll trigger late charges. Her
interest rate will also go up. Rates of over 20% are not uncommon. And that will
mean even larger minimums each month.

Curly will probably do best if she does try to consolidate her credit card
debts. She’ll need to shop for a lender that won’t add a large ‘origination fee’
to the loan amount. She’ll also want to see if the lender can demand immediate
and full repayment. And, if so, under what circumstances. She doesn’t want to be
a few days late with a payment and have them demand repayment of the whole loan.

Consolidating the credit card debts is only half of the battle. She needs to
understand how the balances were accumulated. To do that she will need to
compare income to expenses. The bottom line is simple. If you spend more than
you make on a regular basis, you’re going to accumulate debt.

It’s easy to pull out the credit card when cash is low. Millions of consumers do
it every month. But Curly needs to consider what happens when she charges
groceries. Suppose she can’t afford to pay cash for the $100 worth of groceries
in the cart today. When she uses her credit card she’s agreeing to pay $115 for
those same groceries over the next year or so. That’s because she’ll be paying
for the groceries plus the interest on the money that she’s borrowed. Each time
she does that she digs the hole just a little deeper.

Curly says that they don’t use the cards ‘foolishly’. And that’s good. But if
they’re spending more than their income, Curly will heed to redefine
‘necessities’. What exactly is a ‘lifesaver’? Is that buying enough food to
survive? Or does that include prepackaged convenience foods. It’s easy for
non-essentials to slip in with the really important expenses.

It’s important to note that consolidating the debts will not solve the problem
unless Curly’s income is larger than her expenses each month. That’s not meant
to lecture Curly. Just to warn her that most people only get to consolidate
their debts once. If they go back and do it a second time they’re much more
likely to be heading for bankruptcy.

Hopefully Curly will find a consolidation loan to help her out of the current
payment problem. And then she’ll find a way to make sure that they make more
than they spend on a regular basis.

Gary Foreman is a former Certified Financial Planner who currently edit’s The
Dollar Stretcher website www.stretcher.com
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